Do I need to file Form 1041 for a trust if the only property in the trust (my dad's house) was sold for less than its value at my dad's death (i.e., a capital loss)?

[scobro54]

My dad transferred his house to a trust during his lifetime.  After he died, I (as trustee) sold the house for significantly less than its value on the date of his death (i.e., a capital loss).  The rules for Form 1041 state that a trust needs to file a return if it has "gross income of $600 or more (regardless of taxable income)."  The trust had no other income during the year.

My question is:  Does the trust need to file Form 1041?  In other words, does the trust have gross income if it only has a capital loss?  If the answer is no, and I do not have to file a return for the trust, is there any reason for why I should anyway?  Thank you in advance.

[Anonymous_ · Accepted solution]

"..... is there any reason for why I should anyway?"

There absolutely is a reason you should file a 1041; you can pass that capital loss through to the beneficiary(ies).

Further, you will need to file a 1041 if you receive a tax reporting form, such as a 1099-S. Despite the fact that the filing threshold is not met, the IRS will not know the basis of the property unless you report it on a 1041.

[cjenkinscpa]

The property would need to have been income producing at some point between your father's death and the sale.  Reference this IRS memorandum <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-sca/1998-012.pdf">https://www.irs.gov/pub/irs-sca/1998-012.pdf</a>

[Thomas_A]

I have a similar scenario, i.e. a capital loss from the sale of the home. Using Turbotax business 2021 I don't see how it's possible to make the loss appear on the K-1's for the beneficiaries. I'd appreciate any clues on how it can be done.

[Anonymous_]

If the selling price is lower than the adjusted basis, then the program will show a loss on the transaction.

However, a capital loss cannot be passed through to the beneficiaries until the trust (or estate) is terminated and a final return is filed.

[Thomas_A]

Yes the loss is shown but it’s not being passed to the beneficiaries K-1 forms and I have specified it is the  “Final” return for the trust. 

[Anonymous_]

Then ensure that you make an allocation in the program.

Allocate both to the beneficiaries and to income.

[note that you might have to use Forms Mode to switch the loss from the trust or estate to the beneficiaries]

[Thomas_A]

So this is where I am struggling because I thought the Turbotax Business program would do it for me otherwise I would have hired someone to do it. 

[GeorgeM777]

Yes, to follow-up on the previous posts, you do need to enter the beneficiary information for each beneficiary of the trust.  After that beneficiary information has been entered, TurboTax Business will then guide you in preparing Schedule K-1s for each beneficiary.

@Thomas_A

[Thomas_A]

Thank you for the information but sadly each beneficiary IS set up but Turbotax Business 2021 program never allocates the capital loss to them.  A prior contributor suggested editing the forms manually to force things but I thought (and was lead to believe by Turbotax advertising) the the program should be able to prepare the return correctly without manually manipulating and overriding values of individual forms.  So sad that Turbotax is so misleading in this area and exactly why they are being sued for mis-leading customers in regards to being able to file for "free" only to be hit with charges at the end of the process.  I'm severly disappointed with Turbotax.